The Nobelists vs. Obama and Geithner

The Nobelists vs. Obama and Geithner

 

By E.J. Dionne 

http://www.truthdig.com/report/item/20090401_the_obama_enigma/

 

April 2, 2009

 

The great mystery of the Obama administration's

economic agenda is whether its signature marriage of

boldness and caution will prove to be a Goldilocks

recipe that gets things just right, or a Rube Goldberg

approach of unimaginable complexity and uncertain purpose.

 

Without question, President Obama's tax and budget

proposals are daring, and his unwavering commitment to

passing health care reform this year is both honorable and gutsy.

 

But his plan to bail out the banks reveals a deference

to the existing financial system, deep worry about

further unsettling an already troubled market, and a

devout hope that the economic situation is not as bad

as some economists, notably Nobel Prize winners Paul

Krugman and Joseph Stiglitz, fear.

 

As for the auto industry, Obama has stepped in

aggressively to take effective control of General

Motors by forcing out CEO Rick Wagoner. He told

Chrysler it must merge with Fiat or die.

 

But all these moves are in a context of caution about

the ultimate purpose of the government's actions. Obama

placed strict limits on how long the federal

government's funds will be available to prop up the

companies, and made clear that his only goal was to

rebuild them to compete in the marketplace.

 

Some administration officials feared that this dual-

track approach might win it support from absolutely no

one, since it gave the domestic industry less help than

its supporters hoped for but involved far more

intervention than most free-market advocates could

stomach. The better-than-expected initial reviews

suggested that in the short term, the administration's

tightrope act had worked.

 

Describing what Obama is up to leads quickly to

sentences freighted with contradictions. He wants to

regulate the market more tightly in order to save it.

He thinks big government is required now if we are to

return to a less-restricted economic system later. You

might say that he is using collectivist means to

capitalist ends.

 

"We can't fall back on the stale debates and old

divides," Obama said at his Wednesday news conference

in London with British Prime Minister Gordon Brown.

Obama's alternative is a novel blend of opposing ideas.

 

Nowhere are the challenges facing this method more

dramatic than in the bank rescue. The debate over the

plan is rooted in three disagreements.

 

The most important is over whether some of the major

banks are solvent or insolvent. Treasury Secretary Tim

Geithner believes that the toxic assets in their

portfolios are temporarily undervalued in a bad

economy. This means they will be worth more when the

economy improves, which in turn means that the banks

aren't really broke. Krugman, the New York Times

columnist who has emerged as Geithner's most prominent

critic, thinks the banks are insolvent. He believes

that the economy will improve more slowly than Geithner

does and sees many of the toxic assets as "trash."

 

Therefore, Krugman thinks a temporary government

takeover of some of the banks is inevitable and will

ultimately get the economy moving more quickly.

Geithner thinks a takeover would be more difficult than

its supporters allow and might slow economic recovery.

He prefers the more cautious approach of having

government and private investors buy up the toxic

assets before considering more radical steps.

 

The other two disagreements follow from the first.

Critics of the administration plan (notably Stiglitz)

believe it involves government subsidies for private

investors that are much too large and will leave

taxpayers far too exposed. And there is a difference in

sensibility: Geithner simply has more trust in the

working of the financial system than does Krugman, who

recently criticized the administration as being "in the

grip of the market mystique" and as overrating "the

prowess of the wizards" who perform the market's "magic."

 

Stiglitz is right to worry about the subsidies in the

administration plan and Krugman has good reason to fear

that the administration is too close to Wall Street's

view of reality. But the core question of whether the

banks are insolvent is maddeningly difficult to

resolve. If Geithner is correct, he will move us to

recovery with less disruption. If he's wrong, he will

waste a lot of taxpayer money before eventually

reaching the Krugman solution. My heart is with the

Nobel critics, but my head hopes that Geithner is

making the right bet.

 

That's the Obama enigma: boldness wrapped in caution

rooted in an ambivalent relationship to the status quo.

This is why Obama will, by turns, challenge not only

his entrenched adversaries but also his natural allies.

 

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